Has Your Advisor Already Retired?
Has your financial advisor already retired? As crazy as that might sound, there are a lot of advisors who “retired” years ago and just haven’t let their clients know yet. Many of these advisors looked at what they could sell their business for versus what they’ll earn by “coasting” for another 5-6 years and decided that the latter would put them further ahead in their own retirement.
So what are these advisors that already have one foot out the door doing? Let me explain:
Regardless of what fee model your advisor uses, most advisors earn some type of percentage of the assets they manage. For this example, let’s say they earn 0.75% per year. If they manage $25 million in total assets, that means that they bring in $187,500 gross (out of this they pay for their staff, office, fees, etc and take home whatever is left). If the same advisor decides to sell their practice, they would typically sell their “book” for 2x gross annual revenue, or in this case $375,000.
While $375,000 is a lot of money, some advisors unfortunately get greedy here. They figure that even though they’re ready to retire, they can make more money by coasting for another 6 years. If they do the bare minimum and only respond to direct requests, they figure they can get by with working one day per week. Some clients will no doubt clue in to this and decide to move elsewhere but many will be none the wiser. The advisor figures that if they lose 10% of their client base per year, they’ll still make far more money by coasting along. Starting with $187,500 and decreasing by 10% each year, the advisor will earn $878,547 over the next 6 years! In addition, they can still sell their practice for another $221,433!
By stretching out their departure, the advisor has managed to earn $1.1 million more in revenue instead of selling for the $375,000. Sounds great for the advisor but guess who suffers here? You guessed it, the clients. Unless you work in this industry full time and devout 50+ hours per week to this job, there is no way you can keep up to date on the ever changing markets, tax laws and various financial strategies out there. Someone who is coasting along and doing the bare minimum is in no way able to properly service their client base, no matter how long they’ve been in the industry.
Depending on which numbers you look at, the average age of advisors in Canada is somewhere between 50 and 58 right now, just around the corner from (or already in) retirement. A recent survey showed that 2 out of 3 advisors have no succession plan at all. Furthermore, with a much smaller number of new advisors entering the business, the idea of training a protégé to conduct a gradual transition is becoming much harder. This is a huge problem for many Canadians and if you haven’t already asked, it’s time to do a review of your advisor’s retirement and succession plans. You should ask them what their succession plan is when they retire and also what plans they have in place if they were to pass away unexpectedly. If they don’t have a solid arrangement in place, you should be concerned.
Of course, not all older advisors are following in these dishonest steps. There are some who truly love what they do and have no plans to retire for many years. There are others however who are very much retired already though and it’s up to you to determine which type is working for you.